New rules mean mainland insurance companies are now allowed to buy stakes in more than one competing peer. Photo: Bloomberg

The move by the mainland's insurance regulator to loosen controls on mergers and acquisitions among Chinese insurers is the first step towards establishing an exit mechanism that will allow weaker players to withdraw from the business through market-driven channels, analysts said.

Easing M&A rules was part of the key reform of the mainland's insurance industry, said Wang Guojun, an insurance professor at the University of International Business and Economics.

"This is the first step, which is also an important step," Wang said. Although it would take time, the new rules would likely provide more incentives for companies to undertake M&As, he said, with such consolidation more dependent on market conditions and prices.

Small and medium-sized insurance companies, some of which were poorly operated, were hoping to receive a capital boost or to be bought out, but the lack of an exit mechanism and strict M&A rules had dampened their hopes, Wang said.

The China Insurance Regulatory Commission announced new rules on April 4 that allow insurers to buy a stake in more than one peer, with effect from June 1. Existing rules ban insurers from buying stakes in more than one company that competes in the same market segment.

The 20 per cent shareholding ceiling that an investor can hold in an insurer will also be removed, while any purchase of more than a third of an insurer will need regulatory approval.

In the insurance sector - especially life insurance - an orderly exit from the market has been difficult, because life insurance policies were over very long terms, said Sally Yim, senior credit officer at rating agency Moody's Investors Service.

Some experts also said the existing rules, including insurance law and regulations on closure of financial institutions, provided mostly general guidelines that were not clear enough for insurers to make an exit.

The reform "is a market-oriented approach to allow less competitive companies to sell their businesses and exit the market through M&A", Yim said.

Some small local insurers were poorly operated, but their networks and products were unique enough to attract large investors, she said.

With further liberalisation in traditional insurance products and an expected deregulation of motor insurance rates, small insurance companies would find it hard to compete with large players, Yim said.

The new M&A rules would also provide more room for foreign insurers to expand their presence, she said.

The scale of foreign insurers in the mainland had been limited because of difficulties they faced in gaining approval to set up branches in different cities or provinces.

M&A would be a good channel for them to expand their local networks, Yim said.

Barry Man, insurance sector leader for China at Deloitte Touche Tohmatsu, said although some small insurers were poorly managed, the regulator was unwilling to allow closure of these firms, to avoid market panic.

Although he did not expect a significant increase in M&A activity given the weakness and quality of smaller players, the relaxation of the rules could provide small insurers with a means to exit the market that was not dictated by the government, Man said.

This article appeared in the South China Morning Post print edition as New rules to assist smaller insurance firms